Liquidated delay damages are common in construction contracts and are generally imposed when a contractor fails to achieve substantial completion within the time required by the contract. While contracts like the AIA A201-2017 have provisions for extending the time to achieve substantial completion when delays are caused by circumstances beyond the contractor’s control, delays can result from factors other than improper management or planning and the like, for which the owner is not required to give the contractor additional time. Courts are split on whether there is ever coverage under a CGL policy for contractually agreed upon liquidated delay damages.
In Clark Const. Grp., Inc. v. Eagle Amalgamated Serv., Inc., 01-2478-DV, 2005 WL 2092998, at *1 (W.D. Tenn. Aug. 24, 2005) a general contractor entered a contract for the renovation of the convention center in Memphis. Part of the project included the demolition of a structure attached to the convention center. The demolition work was improperly performed by a subcontractor and resulted in damage to the convention center.
The city sought to recover the costs of repairing the damage and liquidated delay damages under the contract. The contractor sought defense and indemnity from the subcontractor and its CGL insurers. The insurers contended that they had no duty to indemnify and defend the liquidated damages claim because that claim arose from a breach of the contract, which was specifically excluded by the policy. The court held that the delay damages were covered under the policy, and the exclusion did not apply, because the liquidated damages resulted from property damage that was covered under the policy.
In determining whether the contractual liability exclusion precluded coverage for the liquidated damages, the court applied Pennsylvania’s “gist of the action” test, which looks to whether a tort wrong is the gist of the action, and the contract claims are merely collateral. The court rejected the CGL carrier’s arguments, finding that the gist of the action against the subcontractor was based on the accident and was in tort. The court went on to hold that simply because the amount of the damage owed as a result of that accident was defined by the contract, that fact did not make the damages contractual in nature and, as a result, coverage for the liquidated damages was not precluded by the contractual liability exclusion in the CGL policy.
Author and Editor Stu Richeson is an attorney in the litigation section of Phelps' New Orleans office, primarily focusing on commercial litigation with an emphasis on construction matters, intellectual property issues and insurance.